Inside Yesterday’s Stock Market Rally

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The markets got back their mojo Tuesday, with the S&P 500 gaining 1.6%, the Nasdaq climbing 1.8%, and the Dow Jones Industrial Average jumping 1.5%. Apple, the stock that broke the market’s back in recent days, rocketed 5.1% higher, erasing the massive losses it posted Monday.

But let’s not talk about Apple and its power to juice index returns. We’ve already done that. Let’s talk about a market that has been squishy all month and is suddenly buoyant.

Peter Boockvar, equity strategist and portfolio manager for Miller Tabak + Co, sums up the market behavior in one word: Bipolar. Tuesday was a manic day, set off early in the morning in sunny Spain after an unexpectedly successful government auction of short-term debt. Spain, of course, is the new Greece and has the power to set off massive trouble in stock markets globally. The International Monetary Fund brightened the outlook further with a report that raised global growth estimates for the first time in more than a year.

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As Boockvar sees it, the market begins the day (more or less) by deciding if Europe will be a problem for that particular trading session. It’s an ultra-short term approach; consider it the white noise to the day. If Europe doesn’t appear to be on the verge of total collapse, the market becomes primed for good news.

Corporate America obliged with very good news early on. Both Coca Cola and Johnson and Johnson reported solid first quarter earnings. In the high tech area, Stifel Nicolaus managing director David Lutz said both Bank of America Merrill Lynch and Morgan Stanley reported upbeat outlooks on information technology spending. Plus, many traders who had been lying in wait for a market pullback reversed or covered their trading positions – which would help prices move higher. Everyone shrugged off a decline in production in U.S. factories in March. The Industrials busted through the 13,000 milestone again, ending the day at 13,115.54.

The rally was “the path of least resistance,” says Erik Swarts, a trader and author of the Market Anthropology blog.  But he sees 2012 shaping up to be a three-peat of 2010 and 2011. A quick review of those years: January begins with hope and a rally but then the market cracks in the spring or summer as everyone suddenly realizes that Europe remains a mess and that the economic recovery here is not terribly robust.  So the manic market turns depressive. This year, says Swarts, “the pullback could be much greater than 2011” because professionals are more fully invested than they were last year.

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Be prepared in the next few days for a personality shift in the market. Spain did well yesterday, but now investors are getting the willies again about an auction this Thursday of 10-year notes, which everyone says is much more important than the short-term bill sale this morning. Here’s something else to chew on: Market volume has been relatively weak, says Boockvar, which could mean that investors aren’t voting one way or another with both feet. Volume on the New York Stock Exchange today was 3.3 billion, down from the average daily this year of 3.7 billion and 4.2 billion in 2011.

After the market closed Tuesday, investors showed they weren’t feeling as manic as they were at dawn, punishing Intel and IBM even though their earnings beat expectations. Why? They seem to have been upset that IBM sales were flat and that Intel didn’t beat expectations by an even wider margin, Marketwatch reported. Even Apple slipped a tad on the news.

That market mood. You gotta watch it.